It is expected to be a gala time for passenger vehicle (PV) sales that had gone down during the pandemic period as it is expected to hit a record—around 50 lakh units next fiscal. Overall passenger vehicle sales is expected to grow 9-10 per cent on-year next fiscal, scaling to a new all-time high.
As per CRISIL, this will be 20 per cent above the pre-pandemic peak of 40.5 lakh units. This will also be the highest-ever sales achieved by domestic PV original equipment manufacturers (OEMs).
As per the CRISIL report, healthy order book driven by pent-up demand and higher incomes, especially of sport utility vehicles (SUVs), and easing the availability of semiconductors, will support domestic growth even as export growth remains sluggish due to restrictions on repatriation of foreign exchange and high inflationary trends in key export markets.
It is also expected that the healthy volume growth, together with moderating commodity prices, will enable better operating leverage, helping original equipment manufacturers offset the increase in costs incurred in complying with new regulations. Consequently, operating margin is expected to improve to 9-10 per cent next fiscal from 8-8.5 per cent this fiscal.
Better cash generation and already sizeable cash surpluses will support funding of increased capital spend by OEMs as they set up additional capacity, including for electric vehicles (EVs), obviating the need for material debt addition. As per CRISIL, for the current fiscal, domestic PV volume growth is estimated at 24-26 per cent which has been driven by pent-up demand and a large order backlog because of the semiconductor shortage last fiscal. In the first 10 months of the fiscal, domestic sales accounted for 85 per cent of PV volume and exports the balance.
“Domestic PV sales volume should grow 10-12 per cent next fiscal, led by SUVs, which are set to nearly double their share in overall domestic sales to 55 percent from 28 percent in fiscal 2018. Sharper focus of OEMs on SUVs, including compact SUVs, fuelled by customer preference, is driving growth, even as sales of sedans and entry level passenger cars remains sluggish. Export growth is expected at a subdued 2-4 percent, mainly due to restrictions on repatriation of foreign exchange and high inflationary trends in key export markets,” remarked Anuj Sethi, Senior Director, CRISIL Ratings.
Interestingly, EVs are growing at a strong rate exhibiting over 170 per cent growth over the last two years through fiscal 2022, albeit on a low base, supported by tax incentives offered to boost their adoption. Yet, their overall share in PV sales remains at relatively low levels of just about 1 percent currently. Meanwhile, the prices of key raw materials steel, aluminium, and rubber, which remained high until the first half of this fiscal, have moderated over the past five months. This, together with multiple price hikes by OEMs and strong volume growth, is expected to drive up operating margin by 100-200 basis points (bps), to 9-10 per cent next fiscal, despite higher costs for components being installed for regulations.
As per experts from CRISIL, the credit profiles of OEMs rated by them have remained stable despite lower volumes during the pandemic, due to their strong balance sheets and healthy liquidity. With demand sentiments remaining healthy, OEMs have resumed creating a pipeline for future launches, including EV models. Hence, capital spending is estimated to increase 54 per cent to Rs 27,000 crore in fiscals 2023 and 2024 compared with the previous two fiscals. Healthy cash generation and strong liquid surplus is expected to ensure that external borrowings remain low.
